41 141 Federal Power Commission v. Texaco Inc Dougherty v. Texaco Inc 8212 1490 72 8212 1491

• Decision Date: 10 June 1974
• Docket Number: Nos. 72,s. 72
• Citation: 41 L.Ed.2d 141,417 U.S. 380,94 S.Ct. 2315
• Parties: . 41 L.Ed.2d 141 FEDERAL POWER COMMISSION, Petitioner, v. TEXACO INC. et al. Dudley T. DOUGHERTY et al., Co-Executors, Estate of Mrs. James R. Dougherty et al., Petitioners, v. TEXACO INC. et al. —1490 and 72—1491
• Court: U.S. Supreme Court

417 U.S. 380

94 S.Ct. 2315.

41 L.Ed.2d 141

FEDERAL POWER COMMISSION, Petitioner,

v TEXACO INC. et al.

Dudley T. DOUGHERTY et al., Co-Executors, Estate of Mrs.

James R. Dougherty et al., Petitioners,

v. TEXACO INC. et al.

Nos. 72—1490 and 72—1491.

Argued Feb. 19, 1974.

Decided June 10, 1974.

Syllabus.

Following its notice of proposed rulemaking 'propos(ing) prospectively to exempt from regulation under the Natural Gas Act all existing and all future jurisdictional sales made by small producers . . .,' and the filing of comments and informal conferences, the Federal Power Commission (FPC) issued Order No. 428, which exempted all existing and future sales by 'small producers' from direct rate regulation, and provided that they could thereunder contract for the sale of their gas at any obtainable rates, without refund obligations with respect to increased rates, if any, collected for sales regulated thereunder to the pipelines. The FPC asserted that the order did not amount to 'deregulation of sales by small producers,' but was intended to regulate small producers' sales in the course of regulating the rates of pipeline and large producer customers of the small producers. Pipelines purchasing from small producers above ceiling prices were to be allowed 'tracking increases' in their rates, but those rates would be subject to refund 'with respect to new small producer sales, but only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales in the same producing area.' The FPC asserted its intention of reviewing small-producer prices to maintain reasonable rates and specified that small producers remain subject to § 7(b) of the Natural Gas Act. The Court of Appeals set aside the FPC order, holding that the small-producer blanket certificate procedure contravened the FPC's statutory responsibilities under §§ 4 and 5 of the Act to ensure 'just and reasonable rates.' It viewed the order as merely calling for rates that were not unreasonably high as compared with the highest contract prices for large-producer sales or the prevailing market price in the intrastate market, and the court held unacceptable the possible contention that market prices themselves would produce just and reasonable rates. Held:

1. The scheme for regulating small-producer rates indirectly did not exceed the FPC's statutory authority. Pp. 386—393.

(a) Order No. 428 is not invalid because it does not initially consider each company and the reasonableness of its rates, or because it has a two-tier system for small producers and large producers. Cf. Permian Basin Area Rate Cases, 390 U.S. 747, 88 S.Ct. 1344, 20 L.Ed.2d 312. P. 390.

(b) Since pipeline rates are subject to refund to the extent that the purchased gas component of their rates is excessive, there is an incentive 'to bargain prices down.' Pp. 390—391.

(c) Requiring the pipelines and the large producers to assume risks in bargaining for reasonable prices from small producers that might entail refunds unrecoverable from the small producers, is not an abuse of the FPC's discretion under § 4(e) in balancing the interests involved. Pp. 391—392.

(d) It is premature to assert that the indirect regulation contemplated by Order No. 428 is confiscatory, especially since the FPC is to maintain a close review of the avowedly experimental scheme. Pp. 392—393.

2. But it is not clear from the wording of Order No. 428 that it satisfies the statutory requirement that the sale price for gas sold in interstate commerce be just and reasonable; at the least, the order is too ambiguous to satisfy the standard of clarity that an administrative order must exhibit, and the implication that the reasonableness of the small producers' rates would be judged by the assertion that the FPC 'would consider all relevant factors' in determining whether the proposed rates comported with the 'public convenience and necessity' is insufficient to sustain the order. Pp. 394—397.

3. The FPC lacks authority to rely exclusively on market prices as the final measure of 'just and reasonable' rates mandated by the Act; moreover, the FPC order made no finding as to the actual impact the market price increases would have on consumer gas expenditures. Pp. 397—399.

154 U.S.App.D.C. 168, 474 F.2d 416, vacated and remanded.

Mark L. Evans, Washington, D.C., for petitioner in No. 72 1490.

Ben F. Vaughan III, Austin, Tex., for petitioners in No. 72 1491.

Christopher T. Boland, Washington, D.C., and Peter H. Schiff, Albany, N.Y., for respondents in both cases.

Mr. Justice WHITE delivered the opinion of the Court.

This litigation involves the validity of Order No. 428 of the Federal Power Commission, 45 F.P.C. 454 (1971), which provides a blanket certificate procedure for small producers of natural gas, and relieves them of almost all filing requirements. The rates of small producers would no longer be directly regulated but would be subjected to indirect regulation through the review of purchased gas costs of the pipelines and large producers to whom these small producers sell. The Court of Appeals, with one judge dissenting, set aside the order, 154 U.S.App.D.C. 168, 474 F.2d 416 (1972), concluding that the Commission's order amounted to 'deregulation' of small producers and was unauthorized by the Natural Gas Act (the Act), 52 Stat. 821, 15 U.S.C. § 717 et seq. Because the validity of the order is of obvious importance, we granted the petition for a writ of certiorari filed by the Commission in No. 72—1490 and by the estate of Mrs. James R. Dougherty, an intervenor in the Court of Appeals, in No. 72—1491. 414 U.S. 817, 94 S.Ct. 119, 38 L.Ed.2d 49 (1973).

I

On July 23, 1970, the Federal Power Commission issued a notice of proposed rulemaking 'propos(ing) prospectively to exempt from regulation under the Natural Gas Act all existing and all future jurisdictional sales made by small producers . . ..' 35 Fed.Reg. 12,220 (1970). Following the filing of comments and informal conferences, the Commission, noting that one of its important responsibilities was 'to assure maintenance of an adequate gas supply for the interstate market,' issued Order No. 428, aimed at encouraging 'small producers ¹ to increase their exploratory efforts which are so important to the discovery of new sources of gas . . . to facilitate the entry of the small producer into the interstate market and to stimulate competition among producers to sell gas in interstate commerce.'² The small producer was to be assured that 'when he enters into a new contract for the interstate sale of gas, the provisions of his contract will not be subject to change. We also want to relieve the small producer of the expenses and burdens relating to regulatory matters.' 45 F.P.C., at 455. Accordingly, the order provided for a nationwide blanket certificate for small producers and relieved them, with some exceptions, from all filing requirements under the Act. Unlike large producers, subject to Commission-fixed ceilings on rates charged, the small producers could sell gas at the price the market would bear, even though in excess of maximum rates set for producers in pertinent area rate proceedings. Furthermore, they would have 'no refund obligations with respect to increased rates, if any, collected for sales regulated hereunder to pipelines . . ..' Id., at 457.

The order nevertheless asserted that the 'action taken here in our view does not constitute deregulation of sales by small producers.' id., at 455, and that the Commission would continue to regulate such sales in the course of regulating the rates of pipelines and large producers to whom the small producers sell their gas. Pipelines purchasing from small producers at prices in excess of existing ceilings were to be permitted to file 'tracking increases' in their rates, but those rates would be subject to refund 'with respect to new small producer sales, but only as to that part of the rate which is unreasonably high considering appropriate comparisons with highest contract prices for sales by large producers or the prevailing market price for intrastate sales in the same producing area.' Id., at 457. The issue would be resolved either in pipeline rate cases, a proceeding limited to the tracking increase, or in certificate cases. 'The Commission shall consider all relevant factors.' Id., at 458. Review of tracking increases by pipelines was not anticipated as to existing contracts with small producers; the order authorized small producers to increase their rates under these contracts, terms permitting.

Large producers buying from small producers would be permitted tracking increases to the extent authorized by their contracts and without refund obligation 'as long as the price differential is consistent with prevailing price differentials in the area and as long as the small producer prices for new gas are not unreasonably high, considering appropriate comparisons with highest contract prices by large producers or the prevailing market price for intrastate sales in the same producing area.' Id., at 456. To the extent that they reflected small-producer prices in excess of that standard, large-producer tracking increases would be subject to refund.

The Commission finally asserted that '(w)e intend to review the prices established in new contracts or contract amendments relating to sales by small producers to assure the reasonableness of the rates charged by such producers pursuant to the action we are taking herein. In the event we determine that this approach is inimical to the interests of consumers, we shall take further action to protect the consumers.' Id., at 459. The Commission apparently remained free to institute separate proceedings under § 5(a) of the Act, 15 U.S.C. § 717d(a), to reduce the producer's rates prospectively.

The Commission also made clear that small...